Question : Cost behaviour; committed and discretionary costs; highâlow method: mining company
Outback Mining Ltd (OML), which mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.
Straight-line depreciation $30 000
Charitable contributions* 12 000
Mining labour (including oncosts) 315 000
Royalties 140 000
Trucking and hauling 280 000
Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including oncosts) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and hauling costs exhibit the following behaviour:
Less than 1 500 tonnes $240 000
From 1 500â1 899 tonnes 280 000
From 1 900â2 299 tonnes 320 000
From 2 300â2 699 tonnes 360 000
OML uses the highâlow method for analysing cost behaviour.
Required:
1 Assuming that royalties are a semi variable cost, classify each of the other four costs listed above in terms of their behavior as variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi-variable. Show calculations to support your answers for mining labour costs.
2 Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.
3 Comment on the cost effectiveness of hauling 1500 tonnes with respect to OML's trucking/hauling cost. Can the company's cost effectiveness be improved? How?
4 Distinguish between committed and discretionary fixed costs. If OML were to experience severe
Question : Cost behaviour; committed and discretionary costs; highâlow method: mining company
Outback Mining Ltd (OML), which mines ore in Australia's north-west, uses a calendar year for financial reporting purposes. The following selected costs were incurred in December, the low point of activity, when 1400 tonnes of ore were extracted.
Straight-line depreciation $30 000
Charitable contributions* 12 000
Mining labour (including oncosts) 315 000
Royalties 140 000
Trucking and hauling 280 000
Peak activity of 2700 tonnes occurred in June, resulting in mining labour costs (including oncosts) of $607 500, royalties of $224 500, and trucking and haulage costs of $360 000. The trucking and hauling costs exhibit the following behaviour:
Less than 1 500 tonnes $240 000
From 1 500â1 899 tonnes 280 000
From 1 900â2 299 tonnes 320 000
From 2 300â2 699 tonnes 360 000
OML uses the highâlow method for analysing cost behaviour.
Required:
1 Assuming that royalties are a semi variable cost, classify each of the other four costs listed above in terms of their behavior as variable, step-variable, committed fixed, discretionary fixed, step-fixed, or semi-variable. Show calculations to support your answers for mining labour costs.
2 Calculate the total cost for next February when 1650 tonnes of ore are expected to be extracted.
3 Comment on the cost effectiveness of hauling 1500 tonnes with respect to OML's trucking/hauling cost. Can the company's cost effectiveness be improved? How?
4 Distinguish between committed and discretionary fixed costs. If OML were to experience severe
